For a brief period of three years at the beginning of the millennium, the current account recorded a surplus ? the first since 1972-73. The strengthening was attributed to growing competitiveness of Indian industry ? although slackness in the economy no doubt contributed. But as the economy picked up, the surplus of $14 billion in 2003-04 turned precipitately into a deficit of $5 billion the following year. If the current account were to continue to worsen that rapidly, the current year would record a deficit of $14 billion, and next year, $33 billion. Catastrophe could not be postponed forever.

Such a linear projection has proved too optimistic. Figures just put out by the Reserve Bank of India show that the deficit in April-September 2005 had reached $13 billion: the target for the year had been almost reached in six months. At this rate India is going towards a deficit for this financial year that would have been reached next year. The government would profess not to lose sleep over this accelerating plunge into deficit; as long as funds continue to pour in from abroad, a deficit is perfectly affordable. That is fair unless the inflows raise the country?s foreign debt to unsustainable levels. There had been a similar boom supported by generous capital inflows in the late Eighties, and it ended up in 1991 with the RBI being reduced to scrounging for dollars every day and counting them out for oil and other essentials.

That, however, is a nightmare no longer necessary to live with, for the external debt today is close to $125 billion; foreign exchange reserves alone amounted to $144 billion at the end of 2005. There are, in addition, another $60-70 billion foreign funds invested in the equity market. But if foreigners tried to take it out, there would be such a collapse of the stock market that they would lose their shirts. The meltdown of May 19, 2005 would look like a cakewalk. Admittedly, Indian investors too will feel the pinch, but everyone is in it together. The policy of letting in portfolio investment freely has ensured that foreigners share in India?s fortunes ? and India shares in theirs. All economy watchers, especially those abroad, whose job it is to advise international investors, see the balance of payments worsening. They note that exchange reserves, which had risen by $30 billion in 2003-04 and $23 billion in 2004-05, have hardly moved since April. The era of reserve accumulation has come to an end ? which means that capital inflows, large as they are, are just about keeping up with the current account outflows. This is the reality that the government too must wake up to, and take action to confront while it is sitting on ample reserves. Both tariff policy and exchange rate policy need a closer analytical look. Euphoria is a good public stance, but it should not rule out prudence altogether.